Does a Low Price Make This Coffee Chain a Buy?

Dunkin' posted weak quarterly results amid harsh winter weather. Is now your chance to invest in the coffee company?

May 2, 2014 at 9:21PM

Bad winter weather was the culprit behind Dunkin' Brands Group's (NASDAQ:DNKN) weak performance during the first quarter. In contrast, Starbucks (NASDAQ:SBUX) once again reported healthy results, as it continued to outshine its rivals. On the other hand, Keurig Green Mountain (NASDAQ:GMCR) is relying heavily on its recent agreements for future growth.

In this article, I will shed light on Dunkin' Brands in order to find out what's in store for the company.

Quarterly earnings
Dunkin' Brands blamed severe winter weather for its undoing in the most recent quarter. First-quarter earnings fell 3.5% to $23 million, or $0.21 per share, while sales increased 6.2% to $171.9 million. Analysts had predicted earnings per share of $0.36 on sales of $172 million.

U.S. comparable sales ticked up 1.2% at Dunkin' Donuts and 0.5% at Baskin-Robbins. In the international market, same-store sales fell 2.4% at Dunkin' Donuts, while they grew 1.4% at Baskin-Robbins.

Is Dunkin' really going down?
If we look at Dunkin's past quarterly results, we see that its earnings grew considerably in the last three quarters. In the fourth quarter of last year, its earnings rose 77% on a year-over-year basis. In the third quarter, its net income rose 36%; in the second quarter, it reported more than twice the earnings it posted in the comparable quarter.

These quarterly performances are a testimony to the fact that Dunkin's business is growing, and there was some external force behind its disappointing first-quarter results, which was of course severe winter weather. As the majority of Dunkin's shops are located in the weather-affected areas, customers were hesitant to come out of their homes, which had an adverse effect on the company's sales.

Recent developments
Dunkin' Brands has taken a number of initiatives to improve its store performance, including more selective screening of franchisees and improved real estate site selection, noted Matthew Spitznagle, senior research analyst at Eagle Asset Management. Plus, the company is offering new products and services to attract customers.

In March, the company launched online ice cream cake ordering at Baskin-Robbins. Dunkin's CEO Nigel Travis expects a lot from this new service and has a long-term goal of selling 20 million cakes around the world.

Dunkin' Brands is expanding Dunkin' Donuts and Baskin-Robbins, mainly in the Western U.S. The company will open its first traditional California doughnut shop by year-end. As service speed has become one of the most important factors in the fast-food industry these days, Dunkin' is also trying to improve its service time. To do so, the company is testing its new double-sided sandwich-making stations in Florida and Massachusetts. Dunkin's coffee rival, McDonald's, recently suffered due to long serving times, which resulted in lower comparable sales.

Valuation
After the earnings announcement, Dunkin's share price fell slightly. At the moment, the stock is hovering at around $46. Even after posting a dull performance, Dunkin' has reaffirmed its earnings guidance for the year, which is why many investors are still betting on the company. According to the sell side, Dunkin' has a one-year price target of almost $53. This converts into upside potential of 15%. Adding the company's dividend yield of 1.9% into this gives us a total return of 17%.

Starbucks and Keurig Green Mountain
Starbucks expects alcoholic drinks to contribute significantly to its profits in the long run. This is why the company has a plan to introduce these drinks to more than 1,000 cafes in the future. The coffee chain recently partnered with Oprah Winfrey to co-create Teavana Oprah Chai. The spiced tea, which is a mixture of ginger, cardamom, cloves, and cinnamon, will soon be available at Starbucks and Teavana stores in North America.

On the other hand, Keurig Green Mountain has amended its agreement with Starbucks, which means that Starbucks will no longer have the exclusive license for Keurig's highest-end coffee pods. This will allow Keurig Green Mountain to secure licenses with more coffee brands in the future, resulting in more revenue for the company. 

The company has also collaborated with Lavazza, Italy's favorite coffee, to introduce its new Keurig Rivo System in Canada. The system is the first of its kind for Keurig in the espresso-based beverages category in Canada.

Bottom line
Harsh winter weather was the reason behind Dunkin's weak quarterly performance. Had the weather remained stable, the company would have performed in accordance with its previous three quarters, when it posted outstanding results. Dunkin' has reaffirmed its earnings projections for this year, which testifies to the fact that there's nothing to worry about.

Initiatives such as expanding, carefully selecting franchisees, and site selection will ensure the company's growth remains on track. Given the fact that customers these days are much more willing to buy food items online, selling ice cream cakes online will provide a further impetus for sales. Moreover, the company's share price declined after the first-quarter earnings release; this makes it even more attractive. In short, buy Dunkin' Brands.

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Waqar Saif has no position in any stocks mentioned. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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